Contractual advantage: Examples of potentially prohibited practices
A new regulation, Art. 3855 of the Civil Code, enters into force on 1 June 2020. It expands the application of provisions on abusive clauses to cover sole traders. This provision may have repercussions under the Contractual Advantage Act. The competition authority may treat the use of abusive clauses by an entity holding a contractual advantage in contracts with sole traders as abuse of a contractual advantage.
This new risk should be examined together with other, selected commercial practices that may be regarded as violating the Contractual Advantage Act (Act Combating Unfair Exploitation of a Contractual Advantage in Trading in Agricultural and Food Products of 15 December 2016), such as:
- Use of vague contractual terms
- Retroactive changes to commercial conditions
- Reservation of a right to return unsold goods
- Unjustified termination of the contract.
Treatment of the commercial practices discussed in this article as potential unfair exploitation of contractual advantage is based primarily on voluminous materials drafted at the EU level (described in detail in Internetowy Kwartalnik Antymonopolowy i Regulacyjny 2017 no. 8(6), pp. 60–75).
Use of impermissible contractual provisions (abusive clauses) under Civil Code Art. 3851 as exploitation of a contractual advantage
The ban on use of abusive clauses has so far applied only in contractual dealings with consumers.
Expansion of this ban to cover dealings with sole traders (individuals operating single-person businesses) will make it necessary for businesses holding a contractual advantage to review the forms they use for contracts with sole traders for compliance with Civil Code Art. 3851–3855 (these provisions list 23 examples of potentially abusive clauses). Considering that the specific contractual clauses entered in the register of impermissible clauses maintained by the president of the Office of Competition and Consumer Protection (UOKiK) currently number nearly 8,000, such a review will not be an easy task.
It should be assumed that if a clause is abusive within the meaning of Civil Code Art. 3851, by definition it is contrary to fair practice. Consequently, its use would fall within the definition of exploitation of a contractual advantage (although this definition also contains other grounds). Under Art. 7(2) of the Contractual Advantage Act, exploitation of a contractual advantage is deemed unfair if it is contrary to fair practice and threatens or infringes an important interest of the other party. In turn, Civil Code Art. 3851 provides that an impermissible contractual provision (abusive clause) is one that frames the rights and obligations of a consumer (or from 1 June 2020, also a sole trader) in a manner contrary to fair practice.
Simply put, it may thus be said that if a clause is abusive within the meaning of Civil Code Art. 3851, there is a risk that its use by an entity holding a contractual advantage will constitute unfair exploitation of that advantage.
The practice in decisions issued by UOKiK and the Court of Competition and Consumer Protection shows that the scope of clauses that may be found to be abusive is extremely broad. For the most part, clauses found to be abusive tend to be unilateral or non-equivalent, or cause unreasonable inconvenience to the other party.
Use of vague contractual terms
This has to do with provisions that allow a business holding a contractual advantage to interpret the contract to its advantage, e.g. by finding that it covers a broader range of obligations than might seem to appear from the literal wording of the contract.
It is recommended that contracts applied by a business holding a contractual advantage be written in a manner that is clear, transparent, and creates the least room for arbitrary interpretation. For this reason, the use of general clauses and indefinite terms like “in particular,” “accordingly,” “properly,” “significantly” and the like should be reconsidered.
UOKiK particularly questions vague price terms. In the regulator’s view, price terms should be stated so that the price is calculated transparently, based on criteria defined in advance. For this reason, UOKiK takes a dim view of terms allowing one party to arbitrarily set or change the price. A change in price must be made based on concrete conditions written in the contract (as stated for example in UOKiK press releases on analysis of the milk market (2018), the obligation for Rauch Polska to modify its practices (2019), and commencement of proceedings against Jeronimo Martins (2019)).
Retroactive changes to contracts (or commercial terms)
As a rule, a business holding a contractual advantage should not retroactively change contractual terms to the disadvantage of the other party. This applies in particular to changes in financial terms. But the following remarks should be made in this respect:
First, this has to do only with changes affecting the past. Changes in terms of cooperation for the future do not fall within the practice discussed in this point.
Second, modifications made based on rules previously established in the contract (e.g. based on a formula providing that the price will change in line with market circumstances) should not be regarded as a retroactive change. But in this respect the contract should precisely define the circumstances in which the parties may modify the terms of the contract. In other words, it is permissible to use a clause providing for the future that a parameter in the contract will change if at a given moment a market factor changes in a manner defined in the contract. Such a contractual arrangement may give the parties the right to adjust the contractual terms for both past and future periods.
Third, in my view, such changes should be permissible within a reasonable scope that does not smack of unfairness. The basis for such a (fair) change might be, for example, an unexpected change in circumstances involving the market (e.g. a significant change in consumer preferences or the position of the parties and their competitors), the economy (e.g. a major shift in exchange rates), or society (e.g. a decline in poultry consumption as a result of reports on a pandemic in chickens).
Right (mainly of retail chains) to return unsold goods
A common practice of retail chains is to reserve a right to return unsold goods. The return right means that the supplier is required to collect unsold goods from the retail chain, wiping out the right to all or part of the payment for those goods.
Two types of situations should be distinguished within this practice:
- The right to return goods with a long shelf life
- The right to return goods with a short shelf life.
The following principles should apply in both of these situations:
- The rules for return of goods should be established in the contract prior to delivery of the goods.
- The terms agreed in this respect should be clear.
- The costs of returns should be allocated under rational and fair rules between the retailer and the supplier of the goods (which does not necessarily mean 50/50).
- There is no single rule or set proportions in allocating the return costs. The assessment will depend on the circumstances of the given case.
The right to return goods with a long shelf life should not be problematic. If this right is exercised in accordance with the rules mentioned above, there are no grounds for regarding this practice as unfair exploitation of a contractual advantage. It should be pointed out, however, that for a product to have a long shelf life means that at the time of return, the supplier could still sell the goods to other buyers at a reasonable price and in reasonable quantities.
The right of an undertaking holding a contractual advantage to return goods with a short shelf life is more complicated. This applies in particular to baked goods, fresh juices, quickly spoiling fruits and vegetables, fresh meat, fresh fish, and the like. In this case, it appears that it would be fair practice to follow these principles:
- The right of return applies only to a certain quantity of the goods, unless the return is made at a much lower price.
- In the case of return of goods which the seller has no chance to resell to other buyers, the rules for allocation of the related costs should appropriately reflect this fact, in order to make up for the supplier’s loss of the foods.
- The reseller (mainly retail chains) should allow the supplier, at his request, to test a sample of the sales rates, so that the parties can develop fair and realistic return rules. In the case of typical goods, it seems sufficient for the retailer to provide the supplier with anonymous historical data on the rate of returns of several competing products.
Unjustified termination of contract
This is one of the practices enumerated and defined in Art. 7(3)(1) of the Contractual Advantage Act. This provision treats the unjustified termination or threat of termination of a contract as exploitation of a contractual advantage.
In my view, “unjustified” termination should be distinguished from “unlawful” termination.
Unlawful termination of a contract occurs without a legal basis (and would typically also be regarded as “unjustified” for purposes of this provision). An example would be if the contract allows for termination on three months’ notice but one of the parties terminates the contract on one month’s notice.
By contrast, “unjustified” termination of a contract could occur for example when an undertaking holding a contractual advantage gives notice of termination of the contract formally citing as the grounds the termination provision of the contract (and correctly applying that provision), but in reality the termination is punishment for the other party’s failure to agree to some demand. It is not clear, however, whether this would be the case with any kind of demand (including a reasonable and lawful demand) or only a demand that is unlawful or unreasonable. In my view, the termination should be deemed unjustified only if the underlying demand is unlawful or unreasonable.
The law provides an open-ended catalogue of practices potentially prohibited under the Contractual Advantage Act. Determining what is permissible and what is prohibited under this act requires more extensive analysis. Undertakings holding a contractual advantage should consider whether from 1 June 2020 they need to make changes to the contracts they apply in dealings with sole traders, with a view to eliminating abusive clauses.
Dr Antoni Bolecki, attorney-at-law, Competition practice, Wardyński & Partners